The FCPA, MAD, and Too Big to Debar

27 May

Something is wrong here.

I had a great conversation yesterday with Manny Alas, Dan Newcomb, and Barry Vitou, along with some members of the press.  Among the topics discussed were how out of whack investigation costs are, and whether the punishments being meted out for corruption act as a deterrent to future conduct.  We discussed whether it’s true or not that some companies are “too big to debar.”

Here’s a simple truth: companies will continue to pay bribes to obtain business until the cost of non-compliance is greater than the cost of compliance.

The question then becomes what we are willing to do in order to stop companies from bribing.  Because the worst thing you can do if you want to deter conduct is to send mixed messages.  This is a refrain of mine, which you’ve heard if you’ve spoken to me for more than 5 minutes.  You can’t have the CEO on a video saying “act ethically” and have your salespeople get their bonus based solely on sales.  You can’t fine a company (BAE) $400 million dollars but in the next 12 months give them $58 billion in new business.  Let’s see, that’s a net positive of $57.6 billion.  Not even a rounding error.  What does that tell BAE about how serious we are about anti-corruption?  Same with the recent settlement for ITAR violations.  A $79 million fine, and debarment, but then immediate reinstatement.

Does that mean, however, that we should have permanently debarred them, either for the ITAR violations or the bribery?  BAE makes a significant amount from the government.  Other companies make a majority or even a supermajority from the US government, and debarment would put them out of business.  Boeing, for example, couldn’t do much business without the US government.  Don’t believe me?  Read the speech given by their old General Counsel.  It’s not just the government contracts; it’s the government licenses they need to make aircraft.  Do we really want to put Boeing out of business?

Now, a company like Nexus Technologies, which basically admitted to being a criminal enterprise, they needed to be put out of business, and they were.  From a US perspective, do we want to put our best companies out of business?  From an external perspective, would it enhance our place in the world if we caused mass unemployment in other countries when companies would have to lay off hundreds or thousands of workers whose job is to service US government contracts?  Would it serve our national interest?  I certainly don’t want to make our enforcement regime beholden to a “in the national interest” standard, or we could soon end up like Russia or China.  They use enforcement as a tool to achieve political ends.  Our enforcement regime is independent of politics (usually).  I don’t think that’s naive.  I’ve been a prosecutor, and a regulator, and it was always “politics be damned, do what’s right.”  That was true when investigations led to political figures, judges, television stars, and wherever else the facts led.

Then again, in circumstances where we’d want to debar, can we call a company in that situation “our best?”

I don’t claim to have the answer.  Right now we have what in the Cold War was known as MAD, or mutual assured destruction.  If a corporation wants to beat its head against the wall, the DOJ can accommodate.  Debarment is the nuclear option of negotiation.  The DOJ doesn’t even have to threaten it.  They just have to say the word during negotiation.

This is something Tom and I spoke about today on This Week in FCPA.  (It’s in post-processing right now, and will be posted shortly).  Is it something that we should do once or twice?  I want us to stop sending mixed messages.  But I don’t think debarment is the way to do it.  We need consistency, but we don’t need another Arthur Andersen.  What we need to do is raise the cost of non-compliance.  Perhaps the DOJ should include in future DPA Schedule Cs a requirement that companies spend $100 million on compliance every year.  Or perhaps the SEC should use gross revenues for a disgorgement minimum rather than net (and your expenses are your own problem.)  In warfare, true victory requires taking away your enemy’s will to fight.  How do we take away a corporation’s will to bribe?  We make bribery painful, but not deadly.  Very, very painful.  Make managers do charity work in markets most effected by bribery.  Make it so no one in the business unit which paid the bribe can receive a bonus.  When the Fed regulates you, they put people on site.  Let the DOJ do that.  I have no problem with creativity in punishment.

I would also like to see more corporations treat bribe-payers as pariahs.  Voluntarily shun them.  I also believe that bribe-payers should be automatic high-risk third parties.  Make them subject to additional burdens during the partner sign-up phase.  How many companies stopped doing business with Siemens?  Any?  Strange enough to say about the US, but is it a cultural thing?  We need cultural will to change here too.

Because something is wrong here.


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